July 21, 2024

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The country experienced the worst inflation in the last 40 years and the fastest reduction

The country experienced the worst inflation in the last 40 years and the fastest reduction

The faster it went up, the faster it came down. After reaching its highest level in four decades, US inflation eased to 3% in June from 9.1% last year.

Compared to the rest of the world’s richest countries that are part of the Group of Seven (Germany, the United Kingdom, France, Italy, Canada and Japan) The U.S. economy fell sharply after the cost of living hit an all-time high.

“Part of the explanation for America’s relative success in reducing inflation is the role of energy prices,” says Wendy Edelberg, director of the Hamilton Project and senior fellow for economic research at the Brookings Institution think tank.

The country has been exposed to the fallout from the war in Ukraine in a different way than European countries, with the energy impact being more profound due to its close reliance on Russian supplies.

It appears that the world’s largest economy has managed to contain inflationary pressures well, but in reality, the economist says, It was a more complicated path than it seemed.

“Until recently we were very frustrated and anxious,” Edelberg explained in the interview. BBC WorldEspecially the difficulties in reducing core or underlying inflation, i.e. excluding the price of energy and food.

“Now it looks very promising,” Adds.

Increase in interest rates

In the United States there was a huge increase in the demand for goods, and with it the increase in the price of products, “every week is like Christmas”, according to the expert.

Lately, however, that demand has cooled, with what could be a roller coaster downward curve.

05/28/2021 United States Federal Reserve (Fed) Building. Economy United States Federal Reserve

It has a lot to do with the monetary policy of the US Federal Reserve (FED), the equivalent of the central bank. It carried out continuous and deep increases in interest rates to control rising prices.

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The central bank raised interest rates in one way He was unusually aggressive in controlling inflationDavid Wilcox, senior economist at the Peterson Institute for International Economics, says: Bloomberg Economics.

Whether it’s borrowing to buy a house or a car or financing a new investment project, it’s very expensive, acting as a kind of barrier to spending that prevents the inflationary spiral from continuing to grow.

If the horse runs too fast, the central bank tries to avoid abuse, which is used simultaneously in many latitudes, including Latin America.

Federal Reserve Chairman Jerome Powell testifies during a Senate Banking Committee hearing on Capitol Hill in Washington, Thursday, June 22, 2023 (AP Photo/Mariam Zuhaib)
Federal Reserve Chairman Jerome Powell testifies during a Senate Banking Committee hearing on Capitol Hill in Washington, Thursday, June 22, 2023 (AP Photo/Mariam Zuhaib)

Wide range of products

Following the devastation caused by the Covid-19 pandemic, the normalization of the supply of commercially available goods is one factor that has contributed to the high cost of living in the United States, Wilcox says. BBC World.

Severe problems in international trade’s supply chains that had created a “container crisis” with shortages of certain products and astronomical shipping costs began to be addressed.

A view of cargo containers at the Port of Baltimore on Aug. 12, 2022.  (AP Photo/Julio Cortez)
A view of cargo containers at the Port of Baltimore on Aug. 12, 2022. (AP Photo/Julio Cortez)

Thus, the oversupply of goods was able to reduce inflationary pressures and ease the business chaos derived from the health crisis.

But looking things up, war broke out in Ukraine in February 2022 and a new challenge added fuel to the inflationary fire.

This favored the United States for less energy dependence on Russia, and although inflation skyrocketed a few months after the war began, it also fell rapidly, and the central bank put the brakes on government spending.

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However, the waters are not completely calm.

“I don’t think we’re fully back to normal dynamics of inflation and the economy.”Economist says.

Will a recession hit America?

Economic forecasts indicated that the economy had to suffer as interest rates have historically risen to control inflation.

Generally, high rates affect economic growth and increase unemployment.

Ironically, that hasn’t happened in America yet.

Employment remains strong and a recession is no longer around the corner.

This paradox remains an unsolved puzzle for economists.

FILE - A person shops at a supermarket in New York, Wednesday, July 27, 2022.  Rising food prices in the US are reducing demand for home delivery.  Some consumers opt for cheaper services, while others go to grocery stores in person.  (AP Photo/Andreus Gutacki)
FILE – A person shops at a supermarket in New York, Wednesday, July 27, 2022. Rising food prices in the US are reducing demand for home delivery. Some consumers opt for cheaper services, while others go to grocery stores in person. (AP Photo/Andreus Gutacki)

“This story never ends, it’s like a TV series, and we’ve only seen the first season,” Wilcox says. “We don’t know what the author decided.”

A labor market in such good health is very strange given the current circumstances.

According to Edelberg, the first signs are beginning to show that demand for labor is very subdued.

Rather than a deep recession with dire consequences for the rest of the world, the idea of ​​a “soft landing” for the US economy is gaining more ground.

“As I see it, a soft landing involves a slight slowdown”The economist says the country has managed to avoid a deep economic contraction, meaning high levels of unemployment.

BBC World

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Inflation in Canada eased to 2.8% in June due to falling energy prices
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